Forming an LLC can feel like an overwhelmingly laborious and intimidating task. But once you learn how to create an LLC and understand the steps, it’s a far less daunting task.
In this guide, I’ll tell you everything you need to know to start an LLC, what a Limited Liability Company (LLC) is, the differences between LLCs and other business structures, some of the pros and cons of LLCs as well as the cost of LLC formation.
IMPORTANT: If you want to skip straight to the step-by-step guide on how to start an LLC, click here.
Table of Contents
What Is A Limited Liability Company (LLC)?
Before you can decide if a Limited Liability Company (LLC) is right for you and learn how to create an LLC, you’ll need to know what an LLC is.
A Limited Liability Company is a type of business structure specific to the United States whereby business owners enjoy personal liability and asset protection. When a business is converted to an LLC business structure, the business becomes an entity in itself and the liabilities and assets become separate from the LLC owner.
Because they combine both limited liability with pass-through taxation, LLCs are not taxed at the same rates as corporations. LLC owners only have to pay personal income tax on their share of the profits of their LLC.
Most business owners are attracted to the allure of personal asset protection that an LLC provides, as well as the tax benefits that LLCs enjoy.
The Advantages of Forming an LLC
You’ll notice that you get many benefits from forming an LLC. Of course, many small business owners love the personal liability protection and the protection of their personal assets that come with forming a Limited Liability Company, but these aren’t the only benefits that LLCs provide. Here are some of the benefits that business owners cite as their reasons for forming an LLC.
1. Choose Your Management Structure and Operation
If you choose a corporate business structure then your corporation must have a board of directors, conduct annual board meetings and record accurate minutes at the meetings. You don’t get much say in the managerial structure of a corporation so it’s a good idea for all corporation owners to read up on the managerial requirements of corporations in their state. But, with a Limited Liability Company there are no such restrictions, so you may have either a single member-managed LLC or a multimember-managed LLC and you can decide how often the latter meets.
2. No Double Taxation
A corporation’s profits are taxed at corporate rates and further taxed as dividends, which means they’re taxed twice before they even reach shareholders. But, when a small business owner forms a Limited Liability Company, they avoid double taxation and instead only pay personal income taxes.
3. Ownership Choices
You get to choose whether you have one owner or member organization or have multiple members and you can decide the ownership percentages of each member, as well as the criteria for higher ownership percentages.
4. Simple Procedures
Unlike the strict board meeting procedures for corporations, LLCs don’t have the same regulations regarding what happens in board meetings. You’re not required to have board meetings with any frequency and there aren’t requirements about record or bookkeeping either.
5. An Established Entity Recognized by the State
Once your formation documents are filed and processed, as long as you have followed all of the proper formation steps, your business is recognized as an LLC in the state. This makes getting new members, clients and customers easier because advertising your LLC status gives your business some solid credibility.
The Disadvantages of an LLC
Every business structure has both pros and cons. I’ll tell you what the disadvantages of owning a Limited Liability Company are so that you can make an informed decision about forming an LLC.
1. LLCs Are Only Recognized in the U.S.
You really can’t do international business as an LLC because LLCs aren’t recognized in any other country. So, if doing business in other countries is something you want to do, this business structure isn’t ideal for you.
2. The Fees
Every state has different requirements as far as filing fees and formation costs, but every state has fees associated with business formation. They vary widely between $50-$500.
Some states also require LLCs to pay franchise taxes along with annual reports and initial formation filing fees. You should read about the costs associated with forming a Limited Liability Company in your state.
The Differences Between an LLC and Other Business Types
You can’t make an informed decision about whether an LLC is the right structure for your business unless you know a little about other business structures. I’ll provide you with some comparisons below.
An S Corporation is not an entity, rather it is a tax designation. An S Corporation provides personal asset protection and avoids double taxation much like an LLC.
And some LLC owners choose to assign the S Corporation designation to their business for taxation purposes. If an LLC owner chooses S Corporation status they can divide the profits of their business into two different categories: salary and distribution. Since you’re only required by the IRS to pay a 15.3% tax on funds designated as “salary”, the remaining funds labeled “distribution” are all tax-free profit.
Here are the drawbacks of S Corporations:
- The maximum number of owners or shareholders an S Corporation can have is 100.
- It is a requirement that owners of an S Corporation must be permanent residents or citizens of the United States.
- Other business entities can’t own an S Corporation, with very few exceptions.
- Rules about business administration are quite strict about the regulations regarding regular board of directors’ meetings, how the minutes are recorded in these meetings, etc.
- You’re only taxed at one level. There are no other choices when it comes to the taxation of an S Corporation.
A sole proprietorship can be a budget-friendly and simple business solution for many small business owners. There’s not much paperwork to file when you create a sole proprietorship because there’s no distinction between the business owner and the business itself in a sole proprietorship.
But it has its drawbacks:
- The business ownership of a sole proprietorship files their business tax returns together with their personal income taxes, which means they report profits and losses of the company on their personal income taxes.
- There is no personal asset protection with a sole proprietorship.
- As a sole proprietorship, business and personal income and expenses are the same.
- If your business is sued, creditors can request your personal assets as part of their compensation.
A general partnership is formed differently from an LLC and the rules that apply to it are different as well. When you create an LLC there are forms you need to file, filing fees to pay and a lot of formality and red tape to deal with.
You can form a general partnership with an agreement with another person. This could be a verbal (which is ill-advised), written or implied agreement.
This sounds like an ideal way to go into business with a friend but there are drawbacks to a general partnership as well.
- There’s no liability or personal asset protection for either partner in a general partnership.
- If some business catastrophe were to occur and only one of the partners could afford to pay for the business’s debt, that person would be required to pay for all of it themselves whether it’s fair or whether the other partner was at fault for the catastrophe.
- An LLC owner is capable of choosing the share of profits and losses they receive from their company, but in a general partnership, you have to split the profits.
Limited Liability Partnership (LLP)
An LLP and an LLC are quite similar. The IRS doesn’t recognize either business structure except to consider them as pass-through entities that aren’t subject to “double taxation”.
Both business structures offer liability protection but there is a difference. In a Limited Liability Partnership, each partner is responsible only for their investments. So, if another partner screws up or commits a crime, that’s not going to affect your investment or assets.
However, laws regarding LLPs differ from state to state and these liability parameters could be different depending on where you live.
The only drawback of an LLP is that, by definition, an LLP is required to have more than one owner. An LLC can have a single owner, however.
A C Corporation makes good sense for any business owner who conducts business internationally or would like to be able to obtain outside investors.
It’s easier to buy and sell shares of a C Corporation, which means investors are more likely to invest in a C Corporation than in an LLC. C Corporations provide liability protection, as well.
But there are a few drawbacks to C Corporations:
- C Corporations are subject to “double taxation”, paying both corporate and personal income taxes.
- There are strict regulations regarding the administration aspect of C Corporations, much as there are with S Corporations. The board of directors is required to meet regularly and record what happens in their meetings in specific ways, etc.
- C Corporations are taxed at one level.
How to Start an LLC
Although laws regarding LLC formation vary from state to state, the general guidelines are the same throughout the country. If you’d prefer to read a step-by-step LLC formation guide that addresses your specific state needs, click on your state below:
If you just want to read a general LLC formation guide that covers the entire United States, below are the steps you’ll need to take to form your LLC.
IMPORTANT: If you don’t have the mental energy or time to start your own LLC, there are professional services available that can complete the process for you. We’ve reviewed, scored, and ranked the top 20 LLC formation services in the United States to ensure you get the best service at the best price. You can read our complete breakdown here: Best LLC Service
1. Obtain an Articles of Organization, Certificate of Formation or Certificate of Organization Form
No matter which state you’re in, there’s typically one main form associated with LLC formation, though it may have a different name, so the first step is to fill out and file this form. It’s typically referred to as a Certificate of Formation, Certificate of Organization or Articles of Organization form. This form accomplishes three things: announces the formation of your LLC, establishes your LLC legally in your state, and lists the members of your LLC.
In most states a Certificate of Formation or Articles of Organization form will ask for some basic information like the name and address of your business, your business’s registered agent and your LLC members. Some states may ask you to list the purpose of creating your LLC.
You’ll need to decide whether your LLC will be member-managed or manager-managed. This can be confusing to inexperienced LLC owners, but it’s fairly simple. A member-managed LLC is managed by a handful of LLC members who vote on high-level decisions regarding the company, while a manager-managed LLC is run by one person.
Because the Articles of Organization form is the main formation document that you’ll be required to file in your state, the remaining steps will refer to the Articles of Organization form.
2. Choose Your LLC Name
Once you’ve made the decision to form an LLC, the first step is to choose a name for it. Most states require that each business name must be unique, so you must make sure that no other business has already taken the LLC name that you’ve chosen. This can typically be done by performing a business name search on the Secretary of State’s website for your state.
In most states an LLC name must include the words “Limited Liability” or some abbreviation of “LLC” in their name. However, many states have several rules regarding what suffixes you can use with your business name, so you need to check the rules in your state before you choose a name for your LLC.
Once you’ve found a unique name for your business, you typically need to file a Reservation of Name form with the Secretary of State in your state. This reserves the name of your business for a number of days (typically 120) and there’s typically a filing fee associated with filing this form.
If you’re not happy with the business name that you’ve officially registered for your LLC, in many states, you can register for what is known as a trade name, fictitious name, assumed name, or DBA (“Doing Business As”) name. This is the business name that you present to the world on signs, storefronts, advertisements, and on your website.
3. Choose a Registered Agent or Statutory Agent
A registered agent is a legal term for someone who is a go-between for communications from official government agencies (like the Secretary of State) and your business. In some states, this position is referred to as a “statutory agent”. LLCs in most states must choose a registered agent or statutory agent, so this is the third step.
Your registered agent must be available Monday-Friday during business hours to accept mail, legal documents and legal notices (like service of process) from government agencies on behalf of your LLC. You can take on the role of registered agent for your company or hire a professional registered agent service. The only stipulation to being your own registered agent is that you have to be available to receive mail and legal documents during business hours and a registered agent must list a physical street address not a PO Box.
Choosing to be your own registered agent means you’ll have to be available during business hours on weekdays to receive important mail and legal documents for your company. It’s problematic to both act as the registered agent for your company and run your LLC because most LLCs operate during the same hours and you can’t be in two places at once.
Missing a service of process as the registered agent for your LLC could mean that your company could be sued and you may not have a chance to defend yourself against the suit and a default judgment could be devastating, or could even mean you lose your business. Furthermore, missing mail or legal documents from a government agency could mean that your state’s Secretary of State could find that your company isn’t complying with regulations regarding registered agents and decide that your Limited Liability Company is not permitted to legally do business in the state anymore.
A professional registered agent service allows you to keep your personal information off the public record and away from the eyes of cyber criminals and scam artists, requires less work on your part, allows you to run your LLC during business hours, and guarantees that you’ll receive all important correspondence from government agencies in your state. So if you choose a registered agent service, you’ll be rewarded with peace of mind.
The significant consequences of failing in your responsibilities as your own registered as well as the insignificant cost of hiring a professional registered agent service (as low as $99/state/year) mean I ALWAYS recommend hiring a registered agent service.
I’ve reviewed, compared, and ranked the top 12 registered agent services in the United States. You can read a full breakdown of that comparison here: Best Registered Agent
4. Choose Your LLC Address
The name of your LLC isn’t the only important bit of information you’ll need to list on your LLC formation documents. Listing an address for your business is usually one of the state requirements as well. The address that you list on your Articles of Organization for your business is where mail and legal documents will be sent to your LLC, so it’s important.
If you’ve decided not to use a registered agent service then you’ll be forced to list the physical street address of your business on your formation documents. If your business doesn’t have a physical street address then you have no other choice but to add your home or home office address to the form, which will put it on public record and leave you vulnerable to identity theft and scams.
If you hire a registered agent service, they will add an address to the form that can’t be traced to you or your home, which will keep your personal information and your identity safe.
5. File either a Certificate of Formation, Certificate of Organization or Articles of Organization Form
Once you’ve entered all of the pertinent information onto your Certificate of Formation or Articles of Organization form, the last step in creating your LLC is to decide whether to sign it yourself or assign someone to sign and file the form on your behalf. If you decide to sign and file the form yourself, your information will be put on public record. However, a formation service will sign and file your formation documents on your behalf so that your information remains protected.
Depending on your state’s requirements you may be required to publish a notice of formation. States with such requirements typically require that you publish a notice in an authorized newspaper, run the notice consecutively for a few days and obtain a certificate for having done so. You must file this certificate along with your Articles of Organization. To find out what is required by your state, chose your state from the list below:
In most states, you will have two options to meet your LLC filing requirements: you can file by mail or file online. Your state may only offer one of the two options, however. Whichever filing option you choose, you will be required to send in a payment for the filing fee along with your LLC formation documents.
Once you have submitted the required documents to the Secretary of State, they will contact you (generally by mail or email) once your documents and payment have been filed and received. The processing time varies from state to state but typically takes between two to three weeks, with shorter times for those who file online.
You can typically accelerate the processing speed to days rather than weeks by paying for expedited processing. In some states, you can pay for expedited processing directly from the Secretary of State but, if your state doesn’t offer expedited processing, you can typically find a business formation service that offers it.
Other LLC Activities
Aside from jumping through all of the legal hoops to form an LLC in your state, your LLC may be required to take part in a number of other activities that have nothing to do with LLC formation. These activities are just as important, however, because if you don’t take part in them your LLC can lose its legal “Good Standing” status and therefore won’t be able to function as an LLC in the state. Here are some LLC requirements your state may have.
If your Limited Liability Company (LLC) may hire employees or collect sales tax then you will be required to register your LLC with the Department of Taxation in your state. It’s typically fairly easy to register your LLC for tax purposes. It should only require a form or application to be filled out and submitted to register your LLC with the state.
Depending on the requirements of your state for LLCs, you may need to file an annual report with the Secretary of State. You may need to pay a state filing fee to file an annual report. Annual reports are typically due on the anniversary of the formation of your LLC and you may be required to pay a late fee if you pay it late.
You may need to apply for business licenses for your LLC from both state and local sources to maintain good legal standing with the Secretary of State. In many states, you can contact the county clerk’s office in your region to inquire about local business licenses and the Secretary of State issues business licenses for the state.
Commercial or franchise taxes may be one of the requirements your LLC has to meet in your state. This usually replaces the annual report, so you likely won’t have to pay both a filing fee for the annual report and the commercial or franchise tax in your state.
Regardless of which state your LLC is located, one of the requirements of forming an LLC is keeping up with annual federal tax filing. In some states, an LLC may have to file both federal tax and state tax returns, while others don’t. You’ll need to read about tax requirements for LLCs in your state.
If this sounds like a lot of steps to remember and forms that you must file, you’re absolutely right! There is a lot of work that goes into running an LLC. But if you’d like to reduce all the paperwork you need to file and fees you must pay for your LLC, you could consider hiring a PEO company in your state and subscribe to online legal services.
How Much Does It Cost To Form An LLC?
The cost of forming a Limited Liability Company varies widely from state to state. Filing fees associated with LLC formation can cost anywhere between $40-$500.
Along with the filing fee for your main formation document (Certificate of Formation, Certificate of Organization or Articles of Organization), you’ll need to pay a handful of other filing fees for various other permits, licenses, certificates, and taxes in many states. These can include things such as publication fees, fees for business licenses, and name reservation fees. Some states require annual franchise taxes or annual report filing and you must pay a filing fee for each of these as well.
You can find the exact cost of forming your LLC in various states on our LLC Cost page, or you can find it amongst the steps for forming an LLC in each state by clicking on your chosen state:
After Forming Your LLC
Congratulations! You’ve learned how to create an LLC and then went through all of the steps, forming your LLC.
The day you start your LLC is an important day in the life of any business owner and it’s worthy of a bit of celebration. So have a glass of champagne or wine, buy yourself something nice, host a small celebration party with family and friends, or simply have a nice dinner. But don’t relax for long because there are still some steps you need to take so that your LLC will have the foundations necessary to function properly.
Here are the steps you must take after forming your LLC:
1. Create an LLC Operating Agreement
Very few states require LLCs to create an LLC Operating Agreement, but it’s a crucial formation document. This document defines which members are in authority, spells out the ownership percentages of members, details what to do if a member leaves, and provides general instructions about how the business should be run. You don’t want to overlook or skip this step.
If you were to think of the LLC Operating Agreement as an animal then the LLC would function as its skin, scales or outer shell that protects it and the Operating Agreement would be the animal’s nervous system that tells it what to do and how to react to external stimuli.
The LLC Operating Agreement is both a contract between LLC members and a set of detailed instructions about how the business should run. Operating Agreements typically start by listing LLC members before laying out the framework for the financial, managerial, structural and operational aspects of your business.
*IMPORTANT* Before you draft the Operating Agreement for your LLC, you should decide what sort of managerial system your LLC will utilize. Will you use a single-member or multi-member system? A single-member managerial system is run by one member, while a multi-member managerial system is governed by a handful of LLC members who vote on each decision for your company.
Your LLC Operating Agreement should initially list each of your LLC members, identify which member or members have the authority to make high-level decisions for the business, and also list the ownership percentages and the percentages of profits and losses allotted to each member. It should also clearly define the roles and jobs of each of your LLC members, which members or departments they will work most closely with, their supervisors and which tasks each department is in charge of.
Designing the LLC Operating Agreement for your business this way will let LLC members know what their job is, who they answer to, what each department does and spell out the percentage of profits and losses that each member will get.
One important section that many people leave out of their Operating Agreements is a section about succession. It’s important as a business owner that you list what happens to your LLC when one member leaves or when a new member joins. Designing your agreement this way will provide LLC members with a set of clear and logical instructions for what to do when there’s a disagreement among LLC members and, having clear instructions during a time when everyone is running on high emotions, is priceless.
Your Operating Agreement can prevent a lot of arguments in the workplace, provide a lot of information and answer any questions during the first years of your LLC. It’s important that you get your Operating Agreement right, and I’ll explain what could happen if you get it wrong.
If I haven’t been clear with my definitions of Operating Agreements so far, let me clarify: the rules that you establish in your Operating Agreement for your LLC are the specifications for how your business must operate, so getting the agreement wrong could mean stifled business growth. It’s easy to screw up an LLC Operating Agreement by not allowing room in it for things like the growth, change and innovation of your LLC. But if you draft an LLC Operating Agreement well, you should be able to sit back and watch as it grows and flourishes.
If you’ve never written an Operating Agreement before and you want to get it right, you have a few options. You can use the free template from Northwest Registered Agent here. You can also subscribe to online legal services which will help you get the wording right. Or you could hire a formation service which will typically create and file an Operating Agreement for your LLC as part of their services.
2. Apply for an Employer Identification Number
The next step is to apply for an Employer Identification Number (EIN) for your LLC, especially if you plan on taking part in activities such as hiring employees or opening a bank account for your LLC. Of course, you don’t have to hire employees for your small business to apply for an EIN. It’s just a tax identification number that will qualify your LLC for certain licenses and permits in your state.
You can apply for an EIN through the Internal Revenue Service website yourself, which is fairly easy. But if you’d like to take all the guesswork out of EIN application, an LLC formation service in your state that will apply for an EIN on behalf of your company.
3. Open a Business Bank Account
The last step you’ll need to complete so your LLC can stand on its own two feet so to speak is to open a business bank account.
As a small business owner, you may think that this step doesn’t apply to you or that it isn’t important for your business, but this is a major step you don’t want to skip. There are two very good reasons that you must not run your business transactions through your personal bank account.
The first reason is opening a business bank account for your LLC will make filing state and federal taxes a breeze. Many LLC owners assume that they can remember which of the transactions made from their accounts were for personal use and which were for their business. The problem with this type of thinking is that these transactions are usually made months before tax season rolls around and it becomes harder to remember things over time. So to make filing state and federal taxes each year far easier, just open a business bank account for your LLC.
The next reason you should open a business bank account is when you use your personal account for business transactions, you leave your personal information and the assets in your bank account vulnerable. Of course, when you create an LLC you enjoy personal liability and asset protection, but this is nullified when you run your LLC’s business transactions through your personal account.
In short, just open a business bank account. It will make filing both state and federal taxes easier and keep your personal information and assets safe.
To open a business bank account you’ll need what is called a “bank kit”. A bank kit may include copies of formation documents like your Articles of Organization, EIN, Operating Agreement, Certificate of Good Standing and Certificate of Publication.
You may, of course, collect these documents and open a business bank account yourself. However, if you hire an LLC formation service they will typically create a bank kit on behalf of your LLC as part of their services.
Forming an LLC may seem like a daunting task if you don’t know the steps to create one. It’s a far less scary task once you know what to expect. Now that you’ve read this whole guide, you should have a good understanding of what it takes form a Limited Liability Company, but some things may be different in your state.
If you have decided not to use an LLC formation company (which can cost as little as $0 plus state filing fees) then here are the steps you’ll need to follow to form an LLC in your state:
- Obtain the Articles of Organization form
- Name your LLC
- Choose your Registered Agent
- Choose your LLC address
- Sign and file your Articles of Organization
To read more about how to form a Limited Liability Company in your state check out our catalog of LLC formation guides here:
Good luck and congratulations on making the decision to form an LLC in your state!
Frequently Asked Question
Here are answers to some of the most commonly asked questions about forming an LLC
How Long Does it Take to Process LLC Formation Documents?
Processing times vary from state to state. If you submit your formation documents by mail then the average nationwide processing time takes between two to three weeks, with a shorter processing time for those who file online.
You can typically accelerate the processing speed to days rather than weeks by paying for expedited processing. In some states, you can pay for expedited processing directly from the Secretary of State, but if your state doesn’t offer expedited processing you can typically find a business formation service that offers it.
Check to see if your state offers expedited processing in our state-specific LLC formation guides:
As I’ve mentioned, LLCs completely avoid double taxation, but business owners need to understand how they are taxed.
LLCs are taxed as sole proprietorships if they have one member or as partnerships if they have multiple members. Members are considered to be self-employed and therefore have to pay taxes. LLCs can opt to be taxed as S Corporations or C Corporations because doing so can provide tax benefits beyond those that a Limited Liability Company provides.
Some other taxes that you may be required to pay for your LLC include:
- Taxes associated with employment including Social Security taxes, unemployment, Medicare and workers’ compensation.
- Sales taxes
- Franchise taxes
- Property taxes
Each state has its own tax regulations so you’ll need to visit your state’s Department of Taxation as well as the IRS to read about the taxes that your LLC is subject to. It’s also a good idea to consult a qualified accountant to ensure your Limited Liability Company meets its tax filing requirements.
Forming an LLC can seem like a daunting task if you don’t know the steps to create one. It’s a far less scary task once you know what to expect. Now that you’ve read this whole guide, you should have a good understanding of what it takes to form a Limited Liability Company, but some things may be different in your state.
To read more about how to form a Limited Liability Company in your state check out our catalog of LLC formation guides here:
Good luck and congratulations on making the decision to form an LLC in your state!